Overcoming the crisis together
This is not a commentary on Covid-19 - rather a view into the existential threats for SMEs, the role the accountant can play and the solutions available.
Last week I wrote about the Fear Index trying to illustrate that whilst we are at, or close to Peak Fear, fear recedes almost as fast as it arrives.
Jan Hatzius - Chief economist at Goldman Sachs and an economist I respect very much from a former life likens this to the effects of 9/11 rather than the Financial crisis of 2008 i.e. Businesses regardless of size face an existential demand shock. This isn’t a systemic credit problem.
This means that whilst businesses have borrowing requirements for survival, the lenders are in good shape and ready to lend.
The UK Government & Bank of England are on the front foot. They are delivering huge support across a multitude of channels.
Following up the BoE’s rate cut and the budget announcements on the 11th March, today (17th), the Treasury have announced the following:
- £330billion of Government guarantees for bank loans.
- CILS extended from £1.2million upto £5millon - starting 17th.
- Funding grants for upto £25,000 for smaller businesses.
How does the CILS work?
Coronavirus interruption loans will work in a similar manner to its pre-cursor the Enterprise Finance Guarantees (EFG). I.e. 80% of the loan will be secured against a government guarantee. It will apply to term loans, revolving credit, asset finance and invoice finance. As an improved product there will be an interest free period.
Risks we need to consider
- The EFG’s were barely successful due to the red tape associated with the required security.
- EFG’s typically took 4 weeks or more to complete. Therefore given the majority of SMEs have less than £10,000 in their trading accounts, time to funds may be an issue today.
- Despite the security of the Government guarantee, Tier 1 lenders will still abide by their credit underwriting policies, so affordability will still need to be demonstrated (helped by the interest free period in the front 5 months).
So the key risk to the Government's support is the complexity of the process. We will only know next week if this is to be simpler than the EFGs.
There are other alternatives
Outside of the high street there are close to 360 lenders in the UK, who will lend against almost any form of security: personal guarantees, outstanding debtors, unencumbered assets, property, online trading, EPOS payments, contracts and much more. These lenders will likely be more expensive, but they will be able to lend more and lend faster.
Advice for you, Advice for your clients.
It is too early to know how the CILS will fare. If your practice or your clients require funding, always run lenders in parallel. This has always been true, but never has a timing of loan delivery been more important to UK SME. A slow no on a single track in this instance will be catastrophic.
At Capitalise.com, we have already had countless calls with our accountant community asking how to best serve their clients.
Our advice is simple - run the funding enquiries in parallel - you will increase the likelihood of multiple offers.
If you have any questions and would like to talk about the matter further you can reach me at Paul@Capitalise.com. For updates on the status of UK lending, available finance solutions and government grants, go to our hub page for business support.